On China

Adam Smith devotes book IV of The Wealth of Nations to refuting an economic ideology he labels “mercantilism”. If you watched last night’s debates, you see that even today, mercantilism remains the commonsense economic worldview of the median American voter.

The main libertarian reaction to the rise of the Chinese economy is to rejoice. Fifty years ago, Mao Zedong forced forty million or more Chinese people to starve to death. Almost everyone in China was desperately poor. Later, Deng Xiaoping, the de facto leader of China from the late seventies until 1990, permitted a range of bottom-up reforms. He let local municipalities decide how to invest, allowed foreign investment and capitalist markets in special economic zones, and significantly re-privatized farming. Agricultural and industrial output quickly increased. Though China did not (and hasn’t yet) become rich, it went from famines to food surpluses. From a humanitarian point of view, this is wonderful. We should want everyone everywhere to be rich and happy.

Nations are not competing firms. Nations do not compete the way Toyota and Honda compete. “We” are not competing with “them”.

What do economists think about international trade?

Economists have long said there is usually no stronger of an argument to restrict trade between countries as there is to restrict trade between individual cities or between individual people within the same country. Trade is trade. It makes as much sense to protect America from China as to protect New York City from Newark.

Elsewhere:

Economists repeatedly stress—and everyone repeatedly ignores—that international trade is nothing special. From an economic standpoint, increased American trade with China is not much different from increased Virginian trade with Maryland.

Trade is usually a positive sum game.

Should the government use quotas or tariffs to make us buy domestic goods? …one reliable, if imperfect, test that something is a positive-sum game, or at least not a negative-sum game, is this: if given a choice, do people want to play it? If we have to chain people to the bargaining table to keep them from walking away, then we have to suspect we’re not playing a game everyone can win.

Still, some people worry that the Chinese economy will “overtake” the American economy. On its face, that’s like worrying that the Fairfax, Virginia, economy will “overtake” the Falls Church, Virginia economy. But part of the issue here is that people don’t understand the difference between cutting-edge and catch-up growth.

…do not be fooled by high [Chinese] growth rates. The US economy has never grown as fast as the Chinese economy grows now. But the US and Chinese economy are different. China experiences what economists call “catch-up growth”. It had a poor, isolated, and dysfunctional economy. Now, it can copy good business practices, institutions, and technological innovations used in other countries. It thus grows very quickly. The US is at the economic frontier. It cannot enjoy catch-up growth. It has no one to catch up to. For it to grow, it cannot copy others. It has to develop new ideas and technologies.

To understand the difference between cutting-edge and catch-up growth, imagine what would happen to the US economy if Star Trek’s Vulcans traded us their warp drives and particle generators for our corn. The American economy would grow much faster than the Vulcan economy. The most economically illiterate Vulcans might then complain that the American economy would overtake the Vulcan economy.

Ah, you object, but if the Chinese get rich, won’t they use their money to build up their army and take over the world?

… as the economist Frédéric Bastiat said, if goods do not cross borders, troops will. China is prosperous because it sells stuff to Americans. Economic interdependency reduces the probability two countries will go to war, because it increases the amount they have to lose by fighting.

On this point, in A Brief History of Liberty, Schmidtz and I discuss how the desire for economic self-sufficiency or to avoid imports tends to lead to war and empire. For example, consider Athens:

Athenians increasingly began to seek economic self-sufficiency (autarkeia), which, for better or worse, they viewed as making them more free (by minimizing their dependence on international trade). The drive toward autarky led gradually to the formation of an ‘Athenian empire,’ as Athens gained supremacy over its allies in the Delian League (formed in 478/7 bc against the Persians) and began to gather more resources so as to be ‘self-sufficient.’

More on this point:

What sort of foreign policy goes with mercantilism? A feverish one, Plato might have said; and 2000 years later Adam Smith, moral philosopher and Plato scholar would have agreed. If one believes that to buy foreign products is to be a loser in a zero-sum game, then one will want to acquire foreign products by some means other than paying for them. By the same token, if one believes in self-sufficiency as an economic ideal, then merely avoiding trade with neighboring countries will not be enough. One will want to acquire their land and their working populations, thereby moving closer to the ideal of national self-sufficiency. If one is a mercantilist, one begins to think of military might as a first resort, and of voluntary trade as a last resort. Mercantilists do not treat either game as mutually advantageous. They see trade – paying to import wanted goods – as a way of losing, and the military alternative as a way of making the other side lose. So, partly in the name of protecting domestic indus- try and promoting self-sufficiency as an alternative to international trade, and partly out of a desire for glory, mercantilist European states began building empires.

Related

“The most economically illiterate Vulcans might then complain that the American economy would overtake the Vulcan economy.”

No Vulcans that illogical could actually exist.

Mark L

Ah, the no true vulcan fallacy.

http://twitter.com/Locker205 Zachary Taylor

touche

But seriously, Romulus exists for a reason.

Adrian Ratnapala

I never imagined that Plato would be a fan of international trade. Any links to his thought on this?

martinbrock

Still, some people worry that the Chinese economy will “overtake” the American economy.

The Chinese economy can overtake the U.S. economy. Zeno notwithstanding, being ahead does not imply staying ahead. If the Chinese economy leapfrogs the U.S. economy, I have no problem with it, but that’s a separate issue.

I don’t expect the Chinese economy, as a whole, to leapfrog the U.S. economy as a whole, but that’s also a separate issue. “China did not become rich” is hardly meaningful anyway. Some Chinese did become rich.

China’s population is over four times the U.S. population, and the top 25% of China’s population will soon surpass the wealth to the U.S. population. You can forget about the rest of China. These 25% do.

Mercantalism might lead to empire as you say, but import tariffs, export subsidies and other mercantalist policies also create malinvestment by confusing signals of comparative advantage.

China’s state arguably is mercantalist itself, and China’s mercantalist policies create malinvestment in China, but the policies also create malinvestment in the economies of its trading partners.

Some libertarians argue that my trading partner’s export subsidies can only benefit me, but I’m not sure that’s true. If my own state’s subsidies of particular industries can harm me, why can’t another state’s subsidies also harm me?

I’m a radical free trader myself, including trade in labor (immigration), so I don’t advocate retaliatory protectionism, but it’s fair to ask how one ought to respond to a mercantialist trading partner. “Mercantalism is counterproductive and leads to imperialism” doesn’t answer this question.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

Well that you ask the question, “What to do?” I say, leave them alone and have free trade. The reason is that every other action has bad results. A Trade war?, not good. High tariffs? No good. devalue our own currency in response? Not wise.

martinbrock

If free trade includes free trade in labor (unrestricted immigration), I agree.

martinbrock

Bad government is not our fault. It’s Our’s fault.

Sergio Méndez

Hmm…but still there can be a
legitimate libertarian case to worry about the ascent of China as economic
power, and it can be presented in two basic lines or argumentation:

1. The fact that Chinese capitalism (like all forms of capitalism in history, true)
is tied to the construction of a powerful Nation-State. And that nation state
is governed by a totalitarian regimen, which in the actual circumstance – even
if disguised in the old robes of the communist party-, looks clearly more and
more like a fascist type of government.

This is not to say that, in fear of future Chinese imperialistic adventures,
there is a justification or an excuse for a counter (equally imperialistic and
militaristic) attack by the US and/or the west. But certainly there is no libertarian
joy in the ascent of China.

2. Being a State modeled capitalism (still heavily central planed), we, as
libertarians, should worry about the catastrophic consequences it implies (and
the apparent good consequences, which are illusory, such the abundance of cheap
goods, produced by almost slave labor). Those consequences vary and touch workers’
rights, environment, civil liberties for the Chinese people, etc.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

What you are worrying about is something that has never really been observed in the past. Economic growth and freedom has always led, (in fits and starts) to greater personal freedoms,

As China’s rulers seek to hang on to power their position will deteriorate because of demographic problems and because newly industrial societies always reach a point when their high rates of growth slow down. Then the people want more.

Sergio Méndez

Les:

Ever read about German history in the XIX century? One of the biggest industrial and economics powers of their time…did that go hand to hand with “freedom” growth, in a militaristic almost dictatorial regimen?

http://www.facebook.com/les.nearhood Les Kyle Nearhood

Actually Yes it did. But that progress was set backward during a period of enormous economic hardship following WW1.

Sergio Méndez

It did? When? Germany was FORCED to adopt a democracy after its defeat in WWI (actually, the right wingers gave the SPD the control of the goverment just before the end of the war so they could blame them for the defeat). But durting the whole XIX century Germany remained an oppresive dictatorship with under the control of the Kaiser, with a facade of parlamentary goverment.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

nevertheless, my point remains that it was after a very bad economy and hyperinflation that allowed the Third Reich in control. Perhaps I should have not said that economic liberalization always leads to political change, but it almost always does.

Mark L

Autarkeia is still with us today. One of it’s faces is named juche. It is the economic ideology of North Korea.

Ethan Pooley (furball4)

Sure, merchantilism is a poor policy. But isn’t our current policy worse? Right now we set high standards for wages, benefits and working conditions within our borders, but we don’t protect the newly-improved jobs. As a result, any that are mobile tend to leave the country as a result of obvious market pressures. So it’s not that we won’t let workers toil 16 hours a day for $0.80 making our t-shirts, it’s just that they have to do it in Guatemala instead of Ohio. That’s great for Guatemala, but not so good for Ohio – and it is counter to what we (and I use that term very loosely!) were trying to accomplish with our heightened standards: whatever the condition of workers in Ohio, it was probably better than those in Guatemala. So we’ve achieved domestic unemployment and worse net working conditions, all one go.

It would be best to do away with the standards, but it would seem second-best to implement the standards in a way that doesn’t drive labor out of the country.

martinbrock

Statutory labor standards often follow the market rather than leading it. People don’t make t-shirts for a dollar a day in the U.S., because they have better options. People in Guatemala don’t have better options. Maybe their own state unduly limits their options, but short of overthrowing their state, people in the U.S. can’t do much about that.

If we don’t buy the cheap t-shirts from Guatemala, we buy more expensive t-shirts elsewhere, but t-shirts must be far more expensive before the business moves back to the U.S. If all t-shirt makers outside of the U.S. suddenly vanish, t-shirt makers reappear in the U.S., and we pay more for t-shirts while consuming less of other things, but employment opportunities here don’t change much.

Ethan Pooley (furball4)

Not everyone here has better options. Making t-shirts is less strenuous than field work, and can be done by more kinds of people. Families and groups of families can generate several incomes while sharing expenses, including lodging and child care. They are better off doing this in the U.S. than in many poor nations, because of a decent rule of law and the greater opportunities for upward mobility. Even if no existing Americans would do the work, new immigrants would. The minimum wage is probably the most effective anti-immigration policy ever conceived.

martinbrock

All the limits on immigration are the most effective anti-immigration policy ever conceived, but I have no problem with eliminating these limitations and the minimum wage simultaneously.

j r

Except that the minimum wage is almost always above the market-clearing wage.

Go to a spot where day laborers congregate and see how many you can get to work for you for $5 and hour.

Ethan Pooley (furball4)

But this is in a market already affected throughout by the minimum wage and other workplace standards. Parts of the natural market are missing completely, so you aren’t necessarily going to learn anything about what they would be like by observing what exists today. And day laborers will always have a much higher rate because you’re offering no job security. In essence, you’re not only paying them for the hours they work but also for the hours spent waiting for you to come by.

j r

The question is how affected. The literature implies not all that much. If you abolished the minimum wage, you’d likely have a slight drop in wages and a slight rise in employment. The day laborer example was just the one place I could think of where you can go and purchase immigrant labor with very little regulation. I just don’t think there are all these people in general who are hanging out waiting to work for $5 an hour.

If I could wave a magic wand and get rid of one set of workplace regulations, it would be licensing requirements. That would have a much more significant effect.

Ethan Pooley (furball4)

I would argue that any analysis should look at low-wage foreign industries whose product we currently import, and assume that they would all slowly return to domestic locations unless the study can provide plausible reasons why each wouldn’t. At the outset you wouldn’t have the right labor pool, obviously. But in the absence of employment and immigration regulations I don’t know why that labor pool wouldn’t slowly immigrate. It was here to begin with, and there are significant costs to foreign trade. They’re just currently dwarfed by domestic labor costs.

But regardless, yes, I’d be happy to see licensing laws go away first!

j r

“But in the absence of employment and immigration regulations I don’t know why that labor pool wouldn’t slowly immigrate.”

The cost of living? More low-priced t-shirts isn’t going to do much to make America an affordable enough place to live on such a low salary. Unless, of course, you think that getting rid of the minimum wage is going to trigger an unprecedented wave of deflation.

Ethan Pooley (furball4)

It’s our expectations that are high, not the absolute costs. If what we expected was to live three generations to a house, sleep in the same room, eat nothing but staples, use only enough fuel to keep from freezing, work sixty hours a week and walk everywhere, life gets pretty darn cheap. A family of ten could live with perhaps five of them working for around $1.50/hr. This is exactly how a big chunk of the planet lives right now. They just aren’t doing it *here*. They’re doing it in places where they have even fewer practical rights and prospects than they would have in America.

I’m not saying this would all come rushing in. There are a lot of hurdles to it beyond the laws, and I think it would be a very slow and incomplete shift. However, I do think there would be a great deal of this going on if we had never created the laws in the first place.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

Wage rates or only one of many reasons why low end manufacturing and textiles are no longer done in the USA. While it would be nice to see a lot of Government meddling laws reduced, I doubt seriously if those jobs would return in any great number. Low value added consumer goods and textiles are a sign of a poor nation. We ought not even want those kind of jobs. They indicate a comparative advantage for the third world.

martinbrock

We ought not even want those kind of jobs. They indicate a comparative advantage for the third world.

Ethan is right. “We” and “the third world” are collectivist fictions. Persons in the third world should decide where their comparative advantages lie, not “us” and “them”. If some of these persons prefer to live in the U.S. while laboring for consumers in the U.S. at a dollar an hour, they should have this option. Compelling them to labor for a dollar an hour elsewhere is an inefficient restraint of trade.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

I agree that everyone should be free to do as they please. I am just doubtful that low value jobs and low wage workers would both migrate into our nation. And if they did it would certainly be a sign of a diminished economy.

martinbrock

Why is the U.S. economy diminished more by my purchase of dollar an a hour labor in Guatemala, where living and working conditions are worse, than by my purchase of dollar an hour labor in the U.S. where living and working conditions are better? I’m buying dollar an hour labor either way.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

That is not the point I am trying to make. What I am saying is that if an extra 50 or so million low wage workers could make a living in the USA it means that our cost of living has dropped to third world levels, which means our standard of living has also shrunk.

martinbrock

But I think Ethan is right below. It’s not our absolute cost of living. It’s our expectations. A Guatemalan immigrant could afford to live here with an income below the U.S. minimum wage if the immigrant lived as he lives in Guatemala, with three generations in a household, ten people sharing a four bedroom house and one car and one telephone, no cable television, no central heat or air, few modern appliances and so on.

50 million more people living this way north of the Mexican border doesn’t require a lower living standard for anyone currently living north of the Mexican border, and these 50 million people would progress toward a higher living standard more rapidly here.

j r

A couple of things.

As I pointed out above, the minimum wage is lower than the clearing wage in all but a few labor markets. That should be proof enough that the minimum wage does not set expectations, rather expectations set the minimum wage. Changing the minimum wage won’t change expectations.

Also, it’s great that you consider national borders and national-level living standards to be collectivist fictions. From a libertarian perspective, I agree. That doesn’t change the fact that they exist. Far from being merely fictions, they actually exist. People have expectations for a minimum standard of living and you have not outlined exactly how introducing a bunch of low-wage workers from LIC countries is going to change that. Just the opposite, the likely result would be for the progressive left and the nativist right to spring into action, the former to organize those workers and the latter to expel them.

As long as this is a purely a conversation about political theory, I agree with you. My initial comment to Ethan, however, was in regards to what would happen if you abolished the minimum wage: not much.

The U.S. minimum wage reflects the current expectations of central North Americans, but we aren’t discussing central North Americans. The expectations of a Guatemalan need not suddenly change when he crosses a border, so why not lower the guns at the border? Let him come here with the expectations he has. The people here now already compete with him anyway.

Living standards already vary widely within the United States. We’re only discussing a small increase in the width, a tiny increase compared with the existing width. My own parents experienced the living standard we’re discussing in their lifetimes.

Many political interests pursue many political goals. The “progressive left” and “nativist right” have their theories, and we have ours. They also have their real political effects, and we seem to have fewer, though they always tell me otherwise. I just go on theorizing.

martinbrock

… in the absence of employment and immigration regulations …

Language barriers, family loyalty and the like are also significant; however, if you assume away all barriers to competition, you’re right that labor is more local. Labor is less local, because many of these assumptions are false.

Competition is most restricted in the market for labor, particularly in international trade. This fact seems self-evident to me. All sorts of people support these restraints of trade, particularly the labor unions in rich countries, the capitalists in poor countries, and the international labor arbitrageurs in both, not to mention the Baptists and the Bootleggers.

Since practically all economists agree that creative, human labor is the most valuable resource, more valuable than all other natural resources and forcible proprieties combined, the idea that international trade is predominantly free anywhere is laughably ridiculous. If states forbade international trade in everything except human labor, the trade would be much freer.

http://www.facebook.com/les.nearhood Les Kyle Nearhood

It would help if the Press had a clue about economics. People have been sold this nonsense by both parties for decades. It would be refreshing if a journalist asked “Why is it a bad thing for us if our trade partners prosper?” and “How is it bad for the American people to buy inexpensive goods.?”

I agree with much of what you say here, but I have doubts when it comes to the military element. The PLA is very much the Party’s army; Chinese leaders are careful to curry its favor; and ancient notions about dignity and prestige may trump rational self-interest, particularly regarding the military’s designs on Taiwan. Yes, a happy and prosperous China lessens the likelihood of war in general. However, they are not always enough to counter historic resentments and the desire for vengeance.